Why CEA’s views on stimulus are at variance with reality

The most recent of the numbers show that the production in eight core sectors—coal, crude oil, natural gas, refinery products, fertilisers, steel, cement and electricity—declined by 15% in June 2020.

Published: 04th August 2020 07:35 AM  |   Last Updated: 04th August 2020 07:35 AM   |  A+A-

Recession, Economy, Loss

Representational image. (Express Illustration)

With trends for several key indicators now available for the April-June quarter, the impact of the pandemic on the Indian economy is becoming increasingly clear.

The most recent of the numbers show that the production in eight core sectors—coal, crude oil, natural gas, refinery products, fertilisers, steel, cement and electricity—declined by 15% in June 2020 as compared to 22% in the preceding month.

Except fertilisers, all other sectors were in the red. For the first quarter of the 2020-21 fiscal taken as a whole, the decline in their production was almost 25%.

A couple of weeks earlier, foreign trade figures for June as well as the April-June quarter provided yet another facet of the state of the economy.

These figures showed that India had recorded a trade surplus in June 2020, an augury that was favourably commented on by the government.

However, the reality is quite different since the trade surplus resulted from the collapse of imports, which is a strong indication that the economy, especially the manufacturing sector, was on a low ebb. Imports had collapsed through the quarter: While in April and May, imports declined by over 50% as compared to the corresponding period in 2019, the decline was close to 48% in June.

A third indicator is the state of Central government finances, which, not surprisingly, are looking very weak on the revenue side. The lockdown has made its impact felt on net revenue receipts which, for the quarter that ended in June 2020, were down by about 50% over the same period in the previous fiscal. However, monthly net revenue receipts are looking better in June than what they did in April, when they were 71% below the level in April 2019.

It is thus quite evident from all available indicators that in the previous quarter, the Indian economy has experienced an unprecedented decline.

This implies that considerable efforts would be required to get consumer demand and business confidence back to an even keel so that the economy begins to tick again. For this to happen, the government must step up to provide sustained support to the most vulnerable, including the micro enterprises.

This can be gleaned from the experience of most major economies. Furthermore, the International Monetary Fund (IMF) has backed governments to revive their economies, a sharp departure from its earlier position.

With these learning experiences and the IMF advice at hand, it seemed somewhat surprising that in the reckoning of India’s Chief Economic Advisor (CEA), the government would provide the next stimulus when the vaccine for Covid-19 was available, for this, in his view, would stimulate consumer demand for discretionary items. There are two covert messages in the CEA’s view.

The first is that the next stimulus could be expected not before the end of the year or the beginning of the next, since this is the most optimistic time frame for the availability of the vaccines. In other words, the next tranche of stimulus can wait. Secondly, in the economic package announced in May, the government had provided everything necessary to get the fundamentals of the economy in order.

The IMF provides the first set of evidence that the CEA’s views are at variance with reality. In a recent assessment of the initiatives taken by G20 countries to rescue their economies from the throes of the pandemic, the IMF had shown that among them, India is the second lowest in terms of additional spending and revenue, namely on fiscal measures.

This also means that India has devoted the least fiscal resources from among the top 15 economies. Clearly, India needs to do more, for apart from supporting one of the largest economies, government support is urgently needed to support a large informal sector that sits at the base of the Indian economy.

This informal sector has largely been neglected in the economic package, raising concerns about the future of livelihoods. In the May economic package, the government promised Rs 3 lakh crore to businesses and the MSME sector, comprising 6.3 crore units (as of 2015); 99% of these units are micro and are part of the informal sector that do not normally borrow from the formal banking system. The support that the government had promised to businesses and MSMEs are not tailored to the needs of the latter set of enterprises, for at least two reasons.

First, enterprises can receive additional working capital support at concessional rates, equivalent to 20% of their outstanding credit.

This implies that in order to receive support, the units must have borrowed from formal institutions earlier.

Secondly, only those enterprises that follow standard principles for maintaining their accounts can receive support. These are two conditions that almost all MSMEs do not fulfil.

The revival of the Indian economy is impossible without ensuring that the MSME sector gets back on track. Long-term institutional support is essential for ensuring viability of this sector, which the government must provide through its agencies.

Biswajit Dhar
Professor, Centre for Economic Studies and Planning, School of Social Sciences, JNU


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